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The economics of small business – running an eCommerce site

Our website provides a wealth of information for Revere Ware enthusiasts, and we also sell our parts through it.  But operating a small-business eCommerce site continues to be more and more challenging.

For starters, it costs the customer more because of shipping.  With many retailers offering free shipping these days (most notably Amazon.com) customers sometimes are outraged that we charge around $4.50 per order to ship, which can look pretty unreasonable if you order a part that costs $4.00.  But the economics are such that, if we charge $4.50 for shipping (the bulk of which goes to the USPS and a little goes against our fulfillment service) we actually lose money on shipping; on average, it costs us $6-$7 to fulfill an order.

When we first started out, and most of our sales were through our website, it was less, and the shipping charges roughly offset the fulfillment cost.  But as more of our sales moved to Amazon.com, and our volume through our website dropped, the fixed part of our fulfillment service started to drive the cost per shipment up.  The fixed cost is what they charge just to have the service, hold the inventory, etc.  With high volumes, this is very little per order, but as the volume drops, it starts to be a significant cost for each order.

Our sales are shifting away from our own website to Amazon.com for a couple of reasons. The first, of course is that people enjoy the convenience of buying from Amazon – the 1-click ordering (not having to enter all that information) and the free shipping are great.  The second is, given the alternative, some people have a lack of trust for a website they don’t know from Adam.  Lastly, we discovered last year that Amazon.com actually advertises using Google Adwords to capture the business that might actually have been destined for our website.  Yes, they compete with us to drive our sales to their website, even though it is us selling in both places.

But there are a lot of good reasons for us to continue to sell through our own website.  The first is insured availability.  Amazon.com Marketplace is pretty one-sided against the merchant.  Often times, Amazon.com will suspend one of our listings because of high return rates.  This happens because, as a third party selling on Amazon.com Marketplace, we have no ability to set rules about returns; people often buy our parts, without bothering to read the description, and then return them when they don’t fit, providing some lame excuse that makes it seem like the part is defective, so they don’t have to pay a return shipping fee.  This makes it looks like we have an abnormally high return rate at times, which causes Amazon.com to periodically suspend a part listing here and there.

Second, Amazon.com can for no good reason suspend a sellers account, and often does according to this article.  If that were to happen to us, at this point, the economics of our business (we work hard to provide parts you can’t get anywhere else, because we care, and make a little money off of it) would be hard to justify.  If we didn’t continue to sell through our own website, it would make no sense at all, and our parts would likely no longer be available.

Third, we have much less control over the content of our listings on Amazon.com, and our interactions with customers, than on our own website.  The listings are not considered our own, and it often takes some finagling to change the content, because someone occasionally resells a part they purchased from us through our listing on Amazon.com.  And, despite the fact that our own website has a wealth of information on dealing with issues with our parts when they occur, we can’t direct people there or risk having our seller account suspended.

There is a large movement in the US right now to buy local, in response to the difficulties that online shopping presents to local businesses.  In my own town, there is an 11% vacancy rate in our main shopping district, where 10 or 20 years ago 1-2% was typical.  The move to buy local is to support small local businesses that are valuable to the community in more ways than just what you buy there; they provide jobs and help support the local tax base among other things.

Similarly, in light of the increased dominance of eCommerce by just a few large platforms, perhaps there needs to be a similar movement to support small business websites like ours.  I believe businesses like ours provide something valuable that just wouldn’t exist if everything was dominated by Amazon.com and the likes.  Yes, it cost more to buy through our site, but it makes more sense if you purchase multiple items, and consider that when you do buy from us, you are supporting something worthwhile.

So yes, by all means, buy local, and, when you do shop online, buy from small business websites.

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What taxation of online sales means for small businesses

Online retailers come in many varieties.

– Some sell a variety of products, and some. like ours, have a very specialized niche.
– Some online retailers have employees, and some are owner operated.
– Some are a business and some are more of a hobby.
– Some are a full time job for the business owner, and some are a side job. Some, provide no income at all.
– Some, provide products you can’t find anywhere else.

Typical small business

I got my start in this business based on a need.  We were looking for replacement handles for some old Revere Ware and couldn’t find any.  Based on our need, the fact that the company that made Revere Ware, stopped selling replacement parts three decades before we came on the scene, and the large number of Revere Ware pieces that had been sold, I presumed that there was a good opportunity.

So I went through the trouble to get replacement parts manufactured, set up a website with lots of useful information and quite a few replacement parts for sale, and have served the community of Revere Ware cookware owners for almost a decade now.  Our story is probably not that uncommon among the small businesses that sell online exclusively.  This guy makes really cool devices that are useful for getting the most out of vintage Apple computers.  Like us, he serves a small community of customers and potential customers, and his products are incredibly useful for that that need it.

Supreme pain in the *[email protected]#$%

Among this backdrop, consider the Supreme Court ruling that came out this week, which opens the door for South Dakota to require people selling into South Dakota, but who aren’t located in South Dakota, to collect sales tax on the state’s behalf.

Our average order total is between $10 and $20.  We fulfill thousands of orders each year (not hundreds, not tens of thousands).  Right now, we are required to collect sales tax only in our home state, home county, and home city.

Despite the fact that we are more than 20 years into online retailing, quite frankly, the software we use to run our website, is horrible when it comes to extracting data.  Every year, in order to collect the data the California requires us to report about our sales, we spend quite a bit of time slicing and dicing the sales data to figure out exactly how much sales tax we collected, much less all the other data California wants, like breakdown of sales inside and outside the state, county, city.

Even if better eCommerce software was available, switching is expensive.  The last time we updated our website and move to a new platform, it cost us about $10,000.

We deal only with 3 tax jurisdictions.  In the US there are over 12,000 state and local tax jurisdictions.  It isn’t too hard to imaging how requiring online retailers to collect sales tax could become a nightmare that puts retailers like us out of business.  Among the myriad of problems:

– We only have to keep up with three rates right now – one state, one county, and one city.  Requiring us to keep track of and set up to collect 12,000 different tax rates would be simply impossible.  Even 50 or 100 would be substantially more work.
– We only have to file one sales tax return right now, which only includes one state, one county, and one city tax and revenue breakdown.  How in the heck would we file when considering 12,000 jurisdictions?

South Dakota has an exclusion for any business with less than $100,000 or 200 individual sales in the state.  But, for us just to be able to figure out for 50 states whether we are above or below the limit or revenue and transactions will require a lot of work.  And given that we make quite a few sales of small amounts, we will undoubtedly be above such limits in some states.  There will definitely be a crossover point where we just throw up our hands and say “it isn’t worth it anymore.”

A better solution

In my opinion, there needs to be a solution at a Federal level to solve this problem.  This is what I would want:

1. A flat sales tax for online sales that applies to every business every where.
2. A single authority that collects and distribute sales tax revenue to the states, counties, cities.

This presumes a couple of things:

– That 50 states and / or more than 12,000 tax jurisdictions can agree how to apportion tax revenue among themselves.
– That states with higher sales tax than the agreed upon common flat sales tax rate, will agree to accept a lower rate for online sales

Which is basically saying it probably won’t happen  But what if it did?  It would sure make my life easier, and it would remove the barrier for a lot more small businesses to open up.  Every single bit of bureaucratic filings and fees makes it that much harder for a small business to form and stay in business.   Perhaps you haven’t heard, but small business formation is down to about 2/3 of historical norms.  It isn’t hard to imagine that bureaucracy has a lot to do with this.

Government entities are sometimes greedy and unreasonable

Remember that, in addition to the requirements for collecting sales tax and filing returns, there is always the threat that any tax jurisdiction can file an action against a business demanding that they pay a presumed amount of sales tax, or prove that they don’t have to. Thing this is far fetched?  Let me tell you as story.

In California, and probably other states, businesses are required to pay business property tax on assets.  Imaging having to go through everything the business owns, assign it a reasonable value, and then pay property tax on that value, just as you would on real estate.

But there is an exclusion.  If you have less than a certain amount of assets, you don’t have to pay.  But you are _supposed_ to file a return anyways, proving that you don’t have to pay.  It is just another bit of red tape.  I now my business assets are below the threshold required to pay this business property tax, so I never bothered to file a return (who has the time).  So someone that works for the local assessor decided one day to just randomly assign a presumed value of assets that would guarantee I would owe business property tax, and send me a bill … to the wrong address, even though they had my proper mailing address.  Months go by and someone slips one of these letters from the assessor under my door, as they happen to recognize my business name.  Now they are charging me late penalties as well.  Two years later, after filing an appeal with the County Board of Supervisors, and winning, I am still having trouble getting the assessor to remove the assessment from their system.

Now multiply this experience by 12,000 tax jurisdictions and you’ve just killed every small business.

 

 

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Competing against ourselves on Google Adwords

If you regularly read our blog posts, you know that, in addition to writing about topics that are helpful for owners and fans of Revere Ware cookware, we also like to write about our experience running an online business.

Today’s topic is Google Adwords, something which is pretty essential for running almost any online business.  If you don’t get traffic, you can’t make sales.

Let’s start with this graph that shows the average cost per click we’ve paid since we started the business, about 8 years worth of clicks.

One thing to realize is that, when it comes to most of the keywords we advertise for, like “revere ware parts” or “revere ware handle” we are the only business providing these parts.  You might think that there is little to no competition for the Adwords phrases we pay for, and you would be right.  By any standard, the amount we pay per click is tiny.  Some businesses will pay tens or hundreds of dollars for a single click, while we spend mere pennies.

But still, a curious thing has happened over the last 8 years … our cost per click has continue to trend up.  (There are a couple of anomalies to ignore.  The large spike near the start of the graph was us weeding out keywords that were far too costly for our business, and the downward trend towards the end of the graph before it started going up again was us again weeding out the most costly of the phrases we paid for.)

How is this possible given that we are the only business that does what we do?  Well, we recently discovered the likely reason.  Check out this email we recently got from Google.

Well that’s interesting, we are mostly competing with Amazon.com for keyword phrases.  The strange thing about this is that, well, we are the ones selling our parts on Amazon.com.  So, it appears that Amazon.com, in order to move more of the business for our parts to their website rather than to ours, is purchasing the same phrases as us.

What does this mean to our business?  At one level, not much.  Our net margins of selling through our own website and using a fulfillment center to ship the orders, versus selling on Amazon.com and using Fulfillment by Amazon to fulfill the orders is about the same.  Well, mostly.  Take a look at the graph of our margins over the last 13 months.

As you can see, our website margins (in blue) are right in line with the Amazon margins (in red), except for the last two months.  Our fulfillment service has a certain fixed cost for using the service (base cost that doesn’t change every month) and then a variable cost per order (handling, packaging materials, postage).  If our website sales get too low in any month (in the summer months we do about half the volume per month than in the winter months) then there aren’t enough order such that the shipping charges sufficiently offset the fixed costs.  This affect is smaller if you consider the full year, but, if the proportion of our sales that are sold through Amazon.com continues to go up, eventually it simply won’t be profitable for us to sell through our own website anymore; we will at some point start losing money on every order.   Selling through our own website is beneficial, as it allows us to keep much more in touch with our customers, and get direct feedback from them, than selling through Amazon.com, so that would be a shame.

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Revere Ware retail arbitrage on eBay

Arbitrage is the exploitation of economic inbalances.  An example would be borrowing money from a low-interest rate country and investing it in a high interest rate one.

The appears to be some kind of economic arbitrage happening with our parts for sale on Amazon.com and those parts being listed on eBay.  Here is an ad for two of our lid knobs on eBay.

The ad is identical to our listing on Amazon.com, including the title, pictures, and down to the description.  We sell the pair of knobs on Amazon.com for $10.49; on eBay they are listed for $14.49.  Similarly to the fake web store we found a couple of months ago listing our products from Amazon.com, it seems likely that the back-end systems of this seller simply place orders on Amazon.com with free Prime shipping whenever an eBay order is placed, and make a few dollars on the difference between the prices.  This particular seller has 3 other products of ours from Amazon.com listed, all of which are our top sellers (so they are being smart about it).

We can draw a couple of possible conclusions from this phenomenon.

  1. Our prices are too low.  Given the proliferation of our products (and we are the only maker of Revere Ware replacement parts) on eBay at higher prices than we sell on our website or Amazon.com, perhaps the market can bear higher prices.
  2. We should start selling on eBay; there is clearly a market for our parts there.

Doing a little searching on the subject reveals that Amazon-eBay arbitrage is actually a pretty common thing.  There is nothing wrong with it, per se; people are selling a listing something on eBay and then fulfilling the terms of the sale via Amazon.com.  The only problem we have with it is that the un-savvy shopper is paying more than they need to, and that any issues with the sale may track back to us via our Amazon.com sales channel.

We would actually love to use Fulfillment by Amazon as a way to fulfill eBay sales, and the difficulty of fulfilling them separately than how we handle our own website sales (via a fulfillment company), and Amazon.com sales (via fulfillment by Amazon) is what keeps us from listing our products on eBay.   As of yet, there doesn’t appear to be a way to do this that is supported by Amazon.com.

The moral of this story is, if you want the best price on our parts, avoid eBay and go straight to Amazon.com or our website.

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Fake web store?

Plenty of our parts are available on eBay, as we recently mentioned.  Most appear to be parts that were likely obtained through us, or through our store front on Amazon.com, and are simply being resold (at a higher price).  So we aren’t totally shocked that other people are selling our parts.

But we recently found a site that lists all our parts, at substantially higher prices

 

They list a lot of other kitchen related items as well.

Given that we don’t currently sell wholesale, and those are clearly our stock pictures, it seems unlikely that they are fulfilling from inventory. That leaves a couple of options.

Our first thought is that it is a completely fake store and they will just harvest your credit card number and keep your money.

Our second thought is that, it is just a storefront sitting on top of Amazon.com fulfillment.  If they simply order the parts through Amazon and have it directly shipped to the end-customer, they don’t have to carry inventory for any of  the items they are listing.  So far, we haven’t been brave enough to try purchasing something to see if it arrives in an Amazon box.  But if someone is willing to try, we’ve love to see what happens.

The store looks pretty fake, as do the reviews.  It all looks as if someone tried to make it look like a legitimate store, but didn’t quite succeed.

Their contact page lists a German address and an emails: [email protected]  When I go to the tsc-retail page, it is a fancy presentation with text overlay talking about bringing the world closer together through retail … and the video shorts are of Seattle.  Hmm.

In any event, just a word of caution: We are the only folks that make these Revere Ware replacement parts presently.  We sell them through this site, and on Amazon.com.  The items we’ve seen for sale on eBay appear to be legitimate second market items.  But I would stay away form any other outlets (and the prices are much higher anyways).

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The seasonal nature of Revere Ware parts sales

Here is a graph of our sales for every year since we started.

This cyclical pattern appears in almost every way we measure our business.

  • Sales on our website
  • Total site traffic
  • Sales on Amazon.com
  • Google Adwords impressions and clicks
  • Number of Revere Ware related items for sale on eBay.

In retail sales, this is exactly what one would call a seasonal sales cycle.  From peak (December-January) to trough (June-July) is about double the sales.

With respect to our little part of the retail world, I’ve often wondered why people are twice as interested in Revere Ware related items around the holidays then during the summer and fall.

I have no idea what percentage of our replacement parts are purchased as gifts, vs people buying them for themselves.

In any event, it is in interesting factoid around our business we thought we would share.

 

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What 20,000 orders means

We reached a milestone yesterday, order number 20,000.

Since we started selling Revere Ware replacement parts, our business has shifted more and more to Amazon.com.  While we still sell a fair amount through our own website, about 2/3 of our business now comes from selling our projects on Amazon.com.

In all, through both channels (and a brief stint selling on eBay), we’ve fulfilled about 40,000 orders since we started selling back in 2009.  This may not sound like a lot relative to the e-commerce success stories you can read about in the news almost any day.  But for us, we like to think about having made 40,000 people able to continue to use their often decades old cookware, and that makes us happy.  After all, we started this business because we were looking for Revere Ware replacement parts and couldn’t find them.

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Expect good customer service

Just a reminder to our customers or potential customers that we do our best to provide good customer service.

If a product arrives damaged, we will replace it.

If a shipment fails to arrive, we will ask that you work with the Postal Service to locate it, and it that doesn’t work, we will replace it.

If a part fails and you weren’t abusing it, we will replace it.

If you are having an issue installing or using one of our parts, we will do our best to help you, and if that doesn’t work, we will take it back for a refund.

If you have a question, even one that isn’t related to one of our parts or won’t result in a sale, we will do our best to answer it.  However, we do shy away from giving marital advice.

The only thing we ask is that you give us a chance to solve your problem before giving up (and leaving us negative feedback), and that you are kind in your communications.

I wish more people who purchase products online would expect good customer service (and hold businesses accountable when they don’t provide it).  If everyone did that, businesses that didn’t provide good customer service would not survive.

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The economics of small business: when a business is a passion

I often wonder why I do some much for this business when it doesn’t always make economic sense.

Not every business is a profit hungry capitalist empire.  Many small business owners are in business because they are really committed to and passionate about what they do.

Pure capitalism demands that you make logical decisions about revenue and profit margins and only enter a line of business or stay in it when it makes enough money.  But many small business owners got into business not because they wanted to make a lot of money (although making money is nice) but because they felt a need to provide a product or service that they felt people really need.

Often, when this is the case, small business owners do a lot more for their business, in terms of time and money, than the typical business might.

Take our business for example.  We started making replacement parts for Revere Ware, well, because we wanted them, and were frustrated that we couldn’t get them.  Without new parts, our perfectly good 60 year old cookware was useless.  We blindly hoped that there were many others out there that felt the same way we did.

And there are.  We’ve not sure how much we’ve contributed to the rise in popularity of vintage Revere Ware, as evidenced by the increasingly growing numbers of Revere Ware cookware for sale on eBay since we started selling our replacement parts, but we’d like to think we’ve helped people get more pleasure and years more use out of their Revere Ware.

But small business isn’t always about good sense or dollars and cents; sometimes it is about becoming a positive force in that which you feel passionate about.  Small business owners who are passionate about their business will often go much farther than other business owners to provide a good product and service for others interested in what their business is about.

To that end, we’ve spent a lot of time doing things like, organizing all the Revere Ware for sale on eBay so you can easily find what you need, painstakingly searching for and scanning vintage instructions and other materials so we can to help you better understand your cookware, providing DIY how-to guides to help you fix your broken cookware, collecting historical materials, recipes, and such, continuing to add more parts to our catalog because people are asking for them, and spending hours answering questions that often have nothing to do with making a sale.

Economically, this business might not make sense.  With day jobs, small children, and a house under construction, making the time to answer questions or deal with negative feedback on Amazon.com is not always easy.  Our time might be better spent elsewhere.

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The economics of small business: quality, feedback, and ratings

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In today’s climate of ratings and feedback, small businesses like ours can often suffer at the hands of customers who don’t understand the realities and economics of small businesses, or are simply too lackadaisical to go through the trouble of contacting a seller before they go negative on us.

Take, for example, Amazon.com.  I often order books from third party sellers, and see that most of the time sellers are rated in the low 90’s or high 80’s in terms of overall satisfaction.  On eBay, where I’ve been a buyer and seller for almost 20 years, and have a 100% rating across thousands of transactions, buying from someone with such a low rating seems dangerous.  If someone is rated at 90% satisfaction, does that mean I have a one in ten change of having an issue?  On eBay, where the company forces a resolution process on buyers and sellers, this is often the case.  On eBay, if you want a refund, you have no choice but to go through this process to get your money back.  One person’s bad experience can often be indicative of your likelihood of having a problem.

But on sites like Amazon, where we now do quite a bit of our selling, things are very different, and this leads to a very different quality to their ratings.  Consider the following:

Process: Amazon.com has no process whatsoever that helps buyers and sellers resolve issues.  Have a problem and want your money back?  Sure, no problem, just a few clicks and you are there.  The downside of this is that sellers are often not aware that there is a problem at all.  Looking at returns, there is no way for us to tell that someone returned a part for quality reasons, or simply because they didn’t read the detail and ordered the wrong part.

Quantity vs quality of ratings:  On eBay, which is treated by both buyers and sellers more like a community, people are motivated just as much to leave positive feedback when there is a satisfying experience, as they are to leave negative feedback when there is a bad experience.  On Amazon.com, a very very small percentage of buyers actually leave feedback.  This means that an out-sized percentage of people that leave feedback do so because of a problem (and often a problem they never tried to contact the seller about), which almost guarantees that as a seller, you will find it impossible to have a near 100% positive rating.

Shoot first, ask questions later:  This in my opinion is the single biggest problem with feedback and ratings on Amazon.com.  People simply don’t bother to contact the seller when there is a problem.  Perhaps the norm these days for sellers is that they simply don’t take care of their buyers, and buyers expect poor service.  But for our business, this is anything but the case.  We go to great trouble to try and insure our customers get a good product and have a good experience, and when there are problems, we will do what ever we can to resolve it.  Got a defective part, no problem, we’ll ship you a new one.  Part broke for no good reason a year after you bought it, no problem, we’ll replace it.

That is, we’ll do all that, given the chance.  Most of the time, buyers on Amazon.com will simply return a defective part, leave a negative review, and never ask us for help.

People don’t understand how Fulfillment by Amazon works:  People often leave negative feedback for problems with shipping.  When you order something with Amazon Prime shipping, that means it is fulfilled by Amazon.  People don’t seem to realize that in cases like this, the onus for a good shipping experience is on Amazon, not us; we have no control over shipping.  But we get the negative feedback from shipping issues anyways.

All this mean that it is very very hard for a small seller like us to maintain a good seller rating on Amazon.com.  For example, if 300 people buy something from us on Amazon.com in a month, but only 15 leave feedback:

# negative ratings Seller rating
0 100%
1 93%
2 87%

As you can see, just one or two (undeserved) negative ratings can make us look really bad.  If all of our customers left feedback:

# negative ratings Seller rating
0 100%
1 100%
2 99%

Being a small business means that we can’t provide the kind of product quality that large businesses can offer.  While a large business might have the resources or technology to achieve defect rates like .1% or .05%, we measure ours in the 1-3% range depending on product.  So sometimes a part is simply defective and we don’t catch it before it ships.  But what we lack in big business resources, like many small business, we make up for with great customer service.  We’ll do whatever it takes to fix the problem.

So, I beg of you, when you buy from the marketplace on Amazon.com, give the sellers the benefit of the doubt.  If you have a problem with the product or experience, ask the seller for help.  Give them a chance.  Consider leaving negative feedback only when you’ve exhausted your options and the seller clearly deserves it.

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